• CapitaLand Integrated Commercial Trust (SGX:C38U) is in advanced negotiations for new leases to backfill vacant spaces at Capital Tower and CapitaSky, which could potentially improve occupancies by 18ppt and 3ppt respectively to 94% and 95.8%. New supply from IOI Central Boulevard Towers coming on stream in 4Q23 is likely to be largely pre-committed.
• Rent reversion for retail could remain weak due to changes in the tenant mix at some of its retail malls.
• CapitaLand Integrated Commercial Trust provides 2023 distribution yield of 5.4%. Maintain BUY.

Office: Back Working From the Office Again

• Outlook has brightened with all employees allowed back to their workplaces since 26 Apr 22. 47% of employees have returned to work from their offices as of Apr 22. Island-wide net absorption has reversed to positive territory for three consecutive quarters and was 307,282sf in 1Q22. Leasing demand is driven by non-bank financial services, technology, pharmaceutical and fast-moving consumer goods sectors. Vacancy rate for Grade A Core CBD has tightened from the peak of 5.5% in 3Q21 to the current 4.5% in 1Q22. CBRE forecast rents for Grade A Core CBD to recover 6.9% to S$11.55psf/month in 2022 due to limited new supply.
• Upside from backfilling vacant office space. Occupancy for Singapore office improved 1.9ppt q-o-q to 92.3% in 1Q22. There is room to further ramp up occupancies at Capital Tower (76.6%), CapitaGreen (93.6%) and Six Battery Road (88.4%). We understand that CapitaLand Integrated Commercial Trust is in advanced negotiations to finalise a lease agreement with ByteDance to backfill 120,000sf of office space at Capital Tower vacated by JPMorgan. If successfully closed, the new tenant would bring occupancy at Capital Tower back to 94%. Occupancy at newly-acquired CapitaSky (70% stake) is also expected to improve 2.9ppt to 95.8%. Rent reversion could be flat or slightly positive in 2022. Capital Tower should generate positive rent reversion due to low expiry rent of S$5.99psf pm, offset by high expiry rent at AST2 (S$11.31psf pm), CapitaGreen (S$11.33psf pm) and Six Battery Road (S$11.67psf pm).
• New supply pre-committed by technology giants. We understand that Amazon and Meta Platforms are in advanced negotiations to lease office space at IOI Central Boulevard Towers, the only new supply within core CBD over the next three years. Amazon could take up 369,000sf of office space covering 11 floors, representing 29% of the available office space of 1,258,000sf from IOI Central Boulevard Towers. Amazon is expected to consolidate its presence at Marina Bay by keeping 90,000sf of office space at CapitaLand Integrated Commercial Trust’s Asia Square Tower 2 (AST2) (three floors), which is linked to IOI Central Boulevard Towers by a second-storey link bridge.

Retail: Recovery in Consumer Spending

• Safe distancing between individuals is no longer reversion could remain weak due to potential change in tenant mix at some of its retail malls, such as Clark Quay.

AEI

• CapitaLand Integrated Commercial Trust is working on two asset enhancement initiatives (AEI) as part of its tenants that operate during the day (a departure from the current orientation towards nightlife). Detailed plans are still being finalised.

Diversified Sources of Funding

• CapitaLand Integrated Commercial Trust has an active medium term note programme, which accounted for 32% of its total borrowings. CapitaLand Integrated Commercial Trust’s enlarged scale and increased diversification post-merger with CapitaLand Commercial Trust (CCT) has enabled CapitaLand Integrated Commercial Trust to secure a competitive coupon rate from institutional investors.
• Coping with higher interest rates. Aggregate leverage increased 1.9ppt q-o-q to 39.1% in 1Q22. Average term to maturity is 3.9 years and 85% of its borrowings are on fixed interest rates. It has stable cost of debt of 2.3%. Management estimated that a 1% increase in interest rates would result in addition interest expense of S$12.9m per year and reduce DPU by 0.2 cents.

CapitaLand Intergrated Commercial Trust - Earnings Forecast Revision & Recommendation

• We raised our 2022 and 2023 DPU forecast for CapitaLand Integrated Commercial Trust by 2% Model (cost of equity: 6.0%, terminal growth: 1.2%).
• Catalysts:
  • Uptrend in the office sector. Steady recovery in shopper traffic and tenant sales due to easing of social distancing measures.
  • Asset enhancement and redevelopment of existing properties.

Source: UOB Kay Hian Research - 30 May 2022